It wasn’t long ago when Wall Street loved weight-loss drug makers almost as much as companies involved with artificial intelligence (AI).
But that love was short-lived, and has turned into Wall Street’s version of hate - selling a stock.
Consider the company that first came out with best-selling GLP-1 drugs, also known as GLP-1 receptor agonists, a class of medications used to treat type 2 diabetes and obesity: Novo Nordisk (NVO).
Novo’s Slide
Its stock has lost a quarter of its market value since the end of June. That was the point when the Danish company revealed that it was committing around $4 billion to boost U.S. manufacturing capacity to meet surging demand for its obesity and diabetes brands Wegovy and Ozempic, both of which utilize the drug semaglutide.
Sentiment deteriorated after it said that annual profits would come up short of expectations after sales of Wegovy failed to meet unrealistic, sky-high estimates.
Keep in mind, though, that since the onset of the pandemic, Novo Nodisk’s market valuation has quadrupled, so long-term shareholders are still sitting on huge profits.
So what does the future hold for the company?
Novo’s Drugs Broadening Uses
The market for GLP-1 drugs remains huge. Obesity is second only to smoking as the leading cause of death and disability in many Western economies.
And the number of people with diabetes worldwide is expected to more than double from 529 million to 1.3 billion by 2050. This is a 46% increase, even though the world's population is only expected to grow by 20% over the same period.
Here in the U.S., diabetes rates are rising particularly rapidly among the young.
More and more research is pointing to an expanding number of beneficial effects of semaglutide. For example, a recent clinical study showed that an oral version of semaglutide helped to significantly reduce the risk of cardiovascular events in patients with type 2 diabetes.
Other studies found that Ozempic and similar products cut opioid and alcohol abuse by up to half. An analysis of more than 500,000 people with a history of opioid-use disorder showed that more than 8,000 participants who were separately prescribed GLP-1 drugs, such as Ozempic, had a 40% lower rate of opioid overdose than those who did not. And in the more than 5,000 participants suffering from alcohol abuse and using a GLP-1 drug, there was a 50% lower rate of intoxication than for those without a prescription.
The study was published in the journal Addiction on Oct. 17. The findings “provide significant initial evidence that GLP-1 receptor agonists such as semaglutide are associated with reduced rates of overdose and intoxication in patients with opioid and alcohol use disorders,” said Fares Qeadan, associate professor of biostatistics at Loyola University Chicago and a lead researcher for the paper.
The GLP-1 receptors that Ozempic activates to stimulate insulin production and slow food passing through the stomach are also present in the brain’s reward system and are linked to cravings. Researchers are also exploring GLP-1 effects on nicotine addiction and alcoholism in clinical trials.
Novo Nordisk itself is conducting a study into how a new experimental GLP-1 that combines semaglutide with another compound, cagrilintide, could be used to treat alcohol use in patients with liver disease. And it is exploring whether semaglutide can tackle degenerative conditions, such as Alzheimer’s.
Finally, a clinical trial of 400 participants across five continents showed that semaglutide provided pain relief on par with opioid drugs. At the end of the trial, many participants’ pain had subsided enough that they were no longer eligible for the study, said rheumatologist Henning Bliddal: “They got a therapy that was so effective that they more or less were treated out of the study.”
Bottom line: the wide-ranging potential these drugs have is unmeasurable.
NVO vs. LLY
Let’s look at whether Novo Nordisk or its main competitor, Eli Lilly (LLY), is the better investment at the moment.
Less than a year after Lilly began selling Zepbound, sales for its obesity drug are already more than half those of Novo Nordisk’s Wegovy treatment. This helped its stock to jump 54% this year.
Meanwhile, as mentioned earlier, Novo Nordisk shares have fallen 25% since reaching a record high in June.
I think Novo will quickly catch up. First, the company has taken steps to ensure it can keep up with booming demand for Wegovy by investing in production facilities.
More importantly, over the longer-term, trial results are due later this year on its next-generation weight-loss drug. Its experimental obesity medicine, CagriSema, is a once-weekly shot that combines the medicine in Wegovy (semaglutide) with another compound for weight loss - the aforementioned cagrillintide.
Paul Middleton, senior portfolio manager at Mirabaud Asset Management, told Bloomberg: “Given the upcoming data readouts over the next 12 months, we see significant upside potential for Novo to outperform market expectations and regain its leadership in the weight-loss and metabolic drug space.”
Valuations for both Novo and Lilly have come down recently as other drug developers race to enter the obesity market. Lilly just reported rather disappointing results.
Novo shares trade at about 28 times expected earnings, making the Danish stock about a third cheaper than Lilly. And the valuation looks reasonable, given a price/earnings-to-growth (PEG) ratio of 1.4.The current lower valuation for Novo Nordisk provides a great entry point for long-term investors. Buy NVO below $118.
